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Obama Budget Fuels Debate Over Path to Slash Deficit

February 1, 2010 at 12:00 AM EDT
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President Obama proposed a $3.8 trillion budget Monday, a plan that would boost spending for education and increase taxes on the wealthy. But the budget deficit would grow to more than 10 percent of GDP before seeking deficit trims. Gwen Ifill talks to analysts about the tensions between spending and deficit reduction.
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JUDY WOODRUFF: The Obama administration submitted its budget proposal today for the coming fiscal year, a plan that would boost spending for education and increase taxes on the wealthy.

GWEN IFILL: But the budget deficit would grow to more than 10 percent of the U.S. economy, the highest since the end of World War II.

The president’s budget blueprint, delivered to Capitol Hill this morning, is 2,400 pages long, and chockfull of record-breaking numbers. There’s the price tag, $3.8 trillion, and the projected deficit, nearly $1.6 trillion.

That figure would drop back to under $1.3 trillion next year if Congress agrees to impose a three-year freeze in nonsecurity domestic spending and allow the Bush tax cuts for energy companies and families making more than $250,000 a year to expire.

The president said today he also hopes a bipartisan commission will come up with other ways to continue shrinking the deficit.

U.S. PRESIDENT BARACK OBAMA: We simply cannot continue to spend as if deficits don’t have consequences, as if waste doesn’t matter, as if the hard-earned tax dollars of the American people can be treated like Monopoly money.

In order to meet this challenge, I welcome any idea from Democrats and Republicans. What I will not welcome, what I reject, is the same old grandstanding when the cameras are on and the same irresponsible budget policies when the cameras are off.

GWEN IFILL: But the president’s proposal also includes new spending. He insists it’s needed to reverse a sliding economy. He highlighted a $100 billion jobs plan, including small business tax credits, and increased funding for public works and clean energy projects.

BARACK OBAMA: I think it’s very important to understand we won’t be able to bring down this deficit overnight, given that the recovery is still taking hold and families across the country still need help. We will continue, for example, to do what it takes to create jobs. That’s reflected in my budget. It’s essential.

GWE

N IFILL:
Education spending would also go up, nearly doubling the Pell Grant program for college aid to $35 billion, and adding an additional $3 billion for elementary and secondary education.

The president also wants to overhaul the No Child Left Behind program begun in the Bush years. Schools would be judged on test scores over time, instead of for a single year. The budget would also include an additional $33 billion in war funding for Iraq and Afghanistan in 2010, and another $160 billion in the next fiscal year.

At the Pentagon, Defense Secretary Robert Gates said that’s crucial.

ROBERT GATES, U.S. Secretary of Defense: Achieving our objectives in Afghanistan and Iraq has moved to the top of the institutional military’s budgeting, policy and program priorities. We now recognize that America’s ability to deal with threats for years to come will depend importantly on our success in the current conflicts.

GWEN IFILL: To save money, the White House proposal would kill several programs including a plan to return astronauts to the moon. It was projected to cost $100 billion by 2020. Instead, Mr. Obama calls for $6 billion over five years to encourage private spaceflight.

Last week, the president endorsed new bipartisan efforts in Congress, but reaction to his budget today split down party lines.

SEN. HARRY REID, D-Nev.: This budget comes with a lot of zeros. Its numbers are in the millions, billions and trillions. It’s easy to mischaracterize those numbers and what they mean.

But let’s keep some perspective. When you look at this budget as a share of our entire economy, it will cut the deficit by more than a half in just two years. It’s not the last thing we will do to slice the deficit, but it’s a good, good, promising start.

SEN. JON KYL, R-Ariz.: The administration has been touting a spending freeze worth about $250 billion over a decade to help allay concerns about spending and debt.

But it doesn’t start, for one thing, until next October. And, therefore, to, me it’s a little bit like the alcoholic that says, well, I’m going to quit drinking right after I have my next drink.

GWEN IFILL: Hearings on the budget proposal begin tomorrow.

For more on the president’s budget, we turn to two people who follow the process closely. Maya MacGuineas is president of the Committee For a Responsible Federal Budget at the New America Foundation. And Robert Greenstein is executive director of the Center on Budget and Policy Priorities.

Welcome to you both.

Maya MacGuineas, we know there is always a tension between spending and deficit reduction in these budgets, especially this year. Did the president in this plan make the tough choices?

MAYA MACGUINEAS, Committee for a Responsible Federal Budget President, New America Foundation: Well, I think he has framed it right.

We have to focus both on economic recovery and not destabilizing that recovery, and make that big important pivot to dealing with the deficits. I would say it is a good first step in the right direction of starting to deal with deficits, but, at this point, we should be a lot farther along.

We need to be taking a lot more steps. So much more is going to have to be done in terms of debt reduction. And I think the president’s going to have to set the stage by preparing the country and helping the Congress work together to have a realistic understanding that it’s going to take some pretty significant policy changes, which aren’t yet contained in this budget. We’re going to have to go farther.

GWEN IFILL: What do you think about that, Bob Greenstein? Right direction, wrong direction?

ROBERT GREENSTEIN, executive director, Center on Budget and Policy Priorities: Right direction.

We have got a two-part problem. We have a weak economy, and we have a risk that, as the current stimulus fades out, we could even go into a double-dip recession. The budget steps up to the plate on that. It actually has about $265 billion in a combination of things like new jobs tax credits, continuing the unemployment insurance that we really need continuing for a while, fiscal relief to states.

It gives the kind of boost, bigger than some had expected, that we need to keep the economy from going back into a recession. At the same time, it starts to put in some deficit reduction. Over 10 years, it has about $1.2 trillion in reduced deficits, compared to what the deficits would be if we didn’t change any current policies at all. That is a good start.

Is it enough? No. Do we need to go much farther? Yes. But here’s, to me, the interesting part. As a bit of a deficit hawk, I find myself thinking that it was a good decision that the president didn’t go even farther on deficit reduction in this budget, even though we need it, because, had he put even more controversial proposals in the budget, they would have had gotten shot apart by all the interest groups.

GWEN IFILL: Well, let me ask Maya MacGuineas about that, because, in the long term, as Bob Greenstein puts it, that, according to his plan, the deficit would be halved. But it also would consume a greater percentage of the GDP, of gross domestic product, right?

MAYA MACGUINEAS: Right. I think there is no question that the numbers in the budget still leave us on an unsustainable path. And I think the White House would agree with that. The deficits don’t come down far enough and they start to grow again.

At the end of the 10-year period, the debt would be at 77 percent of GDP. Nobody thinks that’s a place where we should be. Now, I do think they are in a bit of a bind. As Bob was just saying, if they were to go out with a budget that was really realistic, it would contain all sorts of things that are basically politically taboo to talk about.

GWEN IFILL: Like? Like?

MAYA MACGUINEAS: I can say them. We need to be talking about reforming entitlements, Social Security and Medicare, in big ways, talking about raising the retirement age, maybe means-testing.

We need to be talking about tax reform in a way that would raise revenues, perhaps a new tax, energy taxes, or consumption taxes.

GWEN IFILL: But, as Bob Greenstein says, even the budget he has proposed isn’t likely to not get shot down.

MAYA MACGUINEAS: Right.

GWEN IFILL: So, how can you even suggest all these as a possibility?

MAYA MACGUINEAS: And I think Bob’s point is right, which is that, if the president came out in this budget and put all of those things, what you would do is, you would actually make a lot of good ideas politically impossible.

So, instead, what I think the president needs to do is, he’s the president. He’s going to have to lead on this. He has to set the stage and start preparing the country that spending freezes, again, a step in the right direction, but they’re not nearly going to be enough to tackle the challenges we have.

And we don’t want to have long lists of tax cuts and spending increases — that’s the fun stuff — without…

GWEN IFILL: So, should the president be trying to tackle things like entitlements, Holy Grails?

ROBERT GREENSTEIN: Well, actually, this budget does tackle some things that are a bit of Holy Grails. So, it hits farm price supports, particularly for wealthy farmers. It closes down most of the special interest tax breaks for oil and gas companies.

It closes down a whole array of tax breaks for multinational corporations that shift jobs overseas and that, particularly, book their profits overseas to avoid paying their fair share of U.S. taxes. It has one thing like this after another. And they, themselves, will be very difficult to pass.

Now, I asked the following question that sort of has occurred to me. The last time we had a successful commission was the Greenspan commission on Social Security in ’82 /’83. If Ronald Reagan, the president, or Tip O’Neill, the Democratic speaker of the House, had put on the table at the beginning of 1982 the various Social Security changes that commission ultimately successfully recommended, they would have been shot apart.

Members of Congress would have gone on record saying, I will never vote for X or Y. And the Greenspan commission probably would have failed.

So, the president put on the table a lot of deficit reduction here that, unfortunately, is probably beyond what the current Congress, with all the filibusters, will achieve. The next step is going to have to come out of this commission. That’s — and that is what I think is envisioned here.

GWEN IFILL: Well, but does this commission — or does this deficit reduction efforts in this budget, does it do anything about the thing people are talking about right now, which is job creation? Does this budget go far enough?

MAYA MACGUINEAS: In terms of job creation, I think it does a good job.

I mean, I think it’s — I think it’s very difficult to say what the most effective policies in terms of stimulating the economy and job creation will be. One honest truth is that the government can only do so much. We have to go through the normal economic recovery.

My reading of the policies contained is that they are well-targeted, that they are thoughtful, and that they try to balance the need to deal with the economy and the fiscal considerations.

I’m far less worried about the parts in the budget that deal with stimulating the economy than I am about the parts that bring the deficit down in the long term. And, again, those policies are much, much more difficult to get passed. And, really, we have to start setting the stage for just how difficult they’re going to be.

I feel like in some ways what we keep doing is moving the goalposts here, saying, well, we can’t get to a reasonable deficit limit because nobody in Congress can get along. So, we will just keep moving the goalposts.

GWEN IFILL: Well…

MAYA MACGUINEAS: But it’s too serious a problem to play that game.

GWEN IFILL: … one of the goalposts has always been bending this health care cost curve. Is there anything that we see in this proposal that speaks to this?

ROBERT GREENSTEIN: But that’s in the health care bills that are on the Hill. I think the…

GWEN IFILL: Which are stuck on the Hill.

ROBERT GREENSTEIN: Well, they’re not — they’re still moving. We will see.

The budget reaffirms the president’s commitment to getting health care passed. If you look at the long-term fiscal problems facing this country, the single biggest driver is rising health care costs. The single most important step we can pass, we can take, is to pass the health care legislation.

It has some deficit reduction in it itself. But, more importantly, that legislation launches a new generation of comparative effectiveness research, demonstrations and pilots, to learn what we don’t now know, which is, what are the big next set of things to do to slow the growth of health care costs, without compromising health care quality?

The health care bills would give us a platform, so, in five years, some number of years, we could go farther. I also worry that, if the health care bills, which do make some important efficiencies in Medicare and in the health care system as a whole, and they have been criticized by special interests — if the health care bill falls apart, I don’t know how many years it will be before policy-makers have the guts to try to reform the health care system again.

GWEN IFILL: Let’s talk about another tough choice. We talked about health care and the cost control, but also this issue of taxation. The president is talking about, essentially, raising the taxes for a lot of people who benefited from the Bush era tax cuts.

How do you raise taxes and not stunt growth? That’s the argument so many Republicans make.

MAYA MACGUINEAS: Well, what he is actually doing is talking about keeping the expiration of certain tax cuts in place. So, I think we always move the baseline here a little bit.

Really, these policies, these tax policies, are all supposed to expire at the end of this year. And he was saying he will extend the Bush tax cuts for everybody making less than $250,000. Does it worry me that he would let some expire? Not at all. I think, overall, if you look at the size of the deficit this year and next year, we’re not talking about overly contractionary policies.

We are not going to throw the economy back into a double-dip recession by letting those tax cuts expire. What worries me more is that he would extend so many of them, without even trying to offset the costs. That is trillions of new dollars in borrowing because we’re not even thinking about, if we are going to extend these, should we pay for some of it?

And the answer in my mind would be, absolutely. We just can’t afford to borrow more for those.

GWEN IFILL: So, middle-class tax cuts, in your opinion, are a bad idea, allowing them to continue?

ROBERT GREENSTEIN: You’re right going to we’re going to hear this idea, that allowing the tax cuts for people making over a quarter-billion dollars a year to expire will reduce job growth.

It is wrong. All we have to do is look at the report that came out last week from the nonpartisan Congressional Budget Office. It looked at a dozen options for how to create jobs and boost the economy right now. It rated extending the tax cuts for wealthy Americans dead last, the reason being that those people will tend to save, rather than spend, a lot of the tax cuts.

What the budget does is, it lets the tax cuts for the wealthy expire. In the short term, it effectively uses those savings for more effective temporary tax cuts, like giving small businesses tax credits for hiring new workers. Those would last for a year. And then, after that, the savings from not continuing the tax cuts for the wealthy would go for deficit reduction.

If we have a given amount of money to spend to try to boost the economy, wouldn’t we want to spend — use it for the approaches that create the most jobs.

GWEN IFILL: Well, we will be watching to see what approach Congress takes as the hearings begin tomorrow.

Robert Greenstein, Maya MacGuineas, thank you, both, very much.

MAYA MACGUINEAS: Thank you.

ROBERT GREENSTEIN: Thank you.